DMFSA is based on a belief that the negotiation process for mutual fund sales agreements should be simpler and faster, and that the back-office processing of commissions should be more accurate and more efficient. Since 2007 a group of companies has co-operated to develop the means to make that belief possible.

The concept and its objectives

Mutual fund sales agreements and the associated commission processing activities are some of the less efficient aspects of the mutual fund industry. Agreements are very often customised legal documents, which take time to prepare and are expensive. Standardisation is uncommon except insofar as large financial groups insist that agreements must be on their own terms. The transposition of agreements into the back office and the commission calculation and payment process is inefficient and a source of operational and financial risk. It is a commonly-held view that industry practice is so fragmented that there is little prospect of improvement.

The aim of this project is to develop a way to improve how the industry creates sales agreements and how it processes the associated commissions. It proposes a legal framework within which fund sales agreements may be made, and a technical framework in which their commercial terms may be defined.

The legal framework proposes the concept of a generally accepted model fund sales agreement. Similar concepts exist elsewhere in the financial industry. A model fund sales agreement could be used in the fund industry for the same reasons that models have been adopted elsewhere: they satisfy most or all of the firms' legal requirements and it is easier to reach agreement on amendments to a commonly accepted model than it is to amend one or the other party's proprietary agreement.

The technical framework defines the commercial term sheet that firms would append to their legal terms. These commercial parameters are capable of being put into an agreement database by a sales assistant in the front office or a commission officer in the back office. In effect, the term sheet is transformed from a legal document into an operational document with legal foundation. It can be produced quickly, cheaply, and very accurately. It can be printed and signed if the parties to the agreement wish to keep physical records or it can be exchanged using electronic messages over a trusted network such as SWIFT. If electronic messages are exchanged on the basis of an unmodified model agreement, there should be no need to print anything and firms will have made their agreement in "dematerialised" form. The term sheet makes it possible for companies to reconcile holdings, report and pay commissions and maintain distribution networks much more easily than today. It also makes it possible to document and apply changes in commercial terms without delay once they have been agreed.

It is very important to understand that the aim of the project is not to restrict the commercial freedom with which companies buy and sell mutual funds. The legal and technical frameworks are designed to be flexible, so that companies can use and if necessary modify them with no loss of freedom or competitive advantage.

For another insight into the DMFSA concept, please read The 10-minute fund sales agreement.

Status of the project

At the end of 2009 the project delivered a detailed and authoritative technical standard for describing a mutual fund sales agreement and its commission terms. The standard uses a precise but flexible syntax and clear semantic definitions. Term sheets that comply with the standard will be definitive and easy to understand and the associated commission processes will be easy to configure and operate. In addition, the project has delivered a comprehensive XML schema, which implements the standard in an ISO 20022-compatible format, and a recommended method for printing a term sheet to paper so that we can benefit from DMFSA without having to wait for the industry to move to a fully dematerialised world. All of these documents are available free of charge on this website and on www.swiftcommunity.net/dmfsa.

In 2010 the project has revised the DMFSA technical standard to support multiple parties to an agreement and their affiliates (enabling Swiss firms to employ the DMFSA standard and opening the way for platforms to use it, subject to an appropriate legal model), and to support back-end loads and switching charges. The project will continue during the year to define agreement lifecycle protocols and commission reporting and reconciliation standards.

In the legal domain the project has drafted a model agreement for international distribution in what might be considered the "classical" model, where the agreement is made directly between the fund promoter and the distributor.

In respect of the commercial use of DMFSA, two companies (Fund-F and Quartal Financial Solutions) have developed term sheet editors that interpret the DMFSA standard. If you would like more information on these, please contact the companies directly.

Further work

We are grateful to the many companies that have contributed to the DMFSA project in the last 3 years, whether through a working group, by providing written feedback to a consultation, by facilitating briefing sessions or by providing infrastructure support. DMFSA is an open project and we welcome whatever support companies can give to help us improve this part of our industry for the common good.

If you would like to follow the project, we post our progress reports at www.swiftcommunity.net/dmfsa. If you would like to join the project please write to feedback@dmfsa.info or to the project leader, Noel.Fessey@Schroders.com.